Is There a Bubble? Top Tech Investors Weigh In

Some of the best-known tech investors appeared at the Fortune Brainstorm Tech conference to discuss their investments and whether we are in another bubble.

Some of the best-known technology investors, including John Doerr of Kleiner Perkins, Egon Durban of Silver Lake Partners, Henry Kravis of KKR, and Reid Hoffman of Greylock Partners, appeared at the Fortune Brainstorm Tech conference over the past few days, talking about their investments and whether we are in another "bubble" similar to what happened in technology in 1999 and 2000.

Most agreed that things are different now, but that private market valuations are high, as evidenced by the number of "unicorns"—private companies that have raised money with a valuation of greater than $1 billion.

Doerr, General Partner of Kleiner Perkins Caufield & Byers(pictured), perhaps the best-known VC investor over many years, compared this market to the 2000 "bubble." He noted there were no smartphones in 2000 and the markets are now five to 10 times larger. He noted that valuations are higher, especially for private companies, but said you can make returns anywhere along the spectrum, not just in early stage venture capital.

He noted that companies were taking longer to go public, because they can now raise a lot of money in private markets, noting that public offerings used to take four years, and now it is more like eight years. He noted there are 61 U.S. "unicorns" and said investors would therefore get exits of at least $3 billion on each of them. Since there have only been seven or eight acquisitions since 2000 of that size, he's assuming these companies will eventually go public.

On investments, Doerr said he is interested in education, saying that he believes billion-dollar companies can be built in that space. He was particularly bullish about augmented reality, saying he expects the virtual reality market will be $30 billion by 2020 and augmented reality will be four times bigger. He is an investor in Magic Leap, which he called "totally transformational."

Overall, Doerr is "still seduced by extraordinary entrepreneurs who want to change the world in a durable way," and said he was most excited by an investment in a stealth company in the digital health space, which he called a $3 trillion market.

Doerr also addressed the Ellen Pao gender discrimination case, saying no one wins in this kind of situation. KPCB tried to settle, but it was impossible, he said. He did note that only 6 percent of venture capitalists are female. "Collectively, we're pathetic," he acknowledged. His firm is taking a number of steps to help with the problem, including unconscious- or hidden-bias training for KPCB and its portfolio companies; issuing diversity reports; sponsoring more diverse fellowships; and trying to help retention and advancement.

KKR co-CEO Kravis said that private equity today has changed pretty dramatically, as PE firms like KKR will now invest up and down the capital structure. "We're not just interested in buyouts," he said.

Kravis said that today there is a "totally different environment" than the tech bubble of 1999-2000. Fifteen years ago, it was all about eyeballs; now we have real businesses with real business plans, he said.

Valuations are a different subject; there is money everywhere today with companies like T. Rowe Price, Wellington, and Fidelity investing in private companies because they have the capital and interest rates are low, Kravis said, which perpetuates these valuations. There will be successes, but given the number of $1 billion private companies, there was probably more downside than upside."

He suggested that companies that need to raise capital today should wait until they have to go public, so they don't have the scrutiny of quarterly earnings. "You should be making long-term decisions," he said.

Asked if he thought there would be another $10 billion tech buyout in the next 12 months, such as the Dell deal, he was skeptical saying new regulations made it harder.

Durban, Managing Partner at Silver Lake, a technology investor perhaps best known for helping to take Dell private, disagreed with Kravis about the possibility of other large private buyouts. He said there was plenty of capital to lend at relatively good rates, and pointed to SilverLake's investment in Avago, which then bought LSI and more recently Broadcom. But he said Silver Lake is willing to deals at different scale, owning a lot of companies like Avago or Dell or just 3 percent of Alibaba, which he described as a "very special business." He said the company's market opportunities are getting larger, as now every company is a technology company.

On Dell, Durban said the company purposely hasn't said a lot, but it has paid down a lot of debt, increased the investment in R&D and sales and marketing. The investment was "obviously in the money." He sees Dell being undervalued by the public markets in terms of how hard it is to build brand, scale, and distribution in hundreds of countries. High-growth assets inside Dell, such as SecureWorks or the Boomi cloud-integration business, have great potential, he said, citing the example of how EMC's Joe Tucci turned VMware into part of a "federation" of companies.

Being private allows the company not to deal with quarterly reports. But this year will be a challenging year because of the Windows product cycle. Other big technology companies are talking about big layoffs, but that is not a priority for Dell because it can take a longer view.

Asked why he was not investing in private "unicorns," Durban said there may be a time and place. Silver Lake is not inclined to build a portfolio because if you invest in lots of businesses that are losing money, you may get stuck in a different place. If you could buy an index of such companies, you could might make two to 2.5 times your money, but while there is now lots of liquidity, when the markets go down, there won't be as much and the private markets could decline much more.

Instead, Durban said, cash flow in the large tech firms are mispriced in this environment, and on a relative basis, he sees that as a better opportunity.

Aneel Bhusri, Workday CEO, and Hoffman, LinkedIn founder and executive chairman, appeared together, noting that they are good friends and that Bhusri was a partner at Greylock Partners and helped bring LinkedIn to that firm for funding. Hoffman is now a partner at Greylock.

Greylock is trying to build a network, Hoffman said, and being an investor lets him talk to lots of other founder, inventors, and operators. That gives him a good sense of what is happening, which helps him be an entrepreneur. Hoffman said he typically works at Greylock on Monday, and spends Tuesday through Friday working at LinkedIn, as well as meeting with entrepreneurs and attending board meetings.

Hoffman is particularly interested in blockchain technology, the concept of a large ledger that's spread across a large number of servers that keeps track of things, such as bitcoins. He said this will create an open platform for financial applications, and said he is investing in companies that help build the platform, which will lead to more applications. This includes things like cheaper electronic banking, easier cross-border transactions, and micro-transactions, though he said "the most interesting things are likely to be things you haven't thought of."

Bhusri talked about how Workday, a cloud provider of human resources and financial software for large enterprises, is competing with SAP and Oracle in enterprise software, saying that cloud and SaaS software are now leading to a replacement cycle that comes around only once every 15 years. The public company now has customers such as Coca-Cola, HP, Dell, eBay, Morgan Stanley, and Goldman Sachs, all of which are replacing legacy systems. One new focus is using predictive analytics for doing things like recommending good or bad candidates or recognizing false expense accounts. Another example he noted was predicting the turnover rate of top performers.

Workday is a public company, but because he and co-founder Dave Duffield control the votes, it will not be sold to Oracle (as happened with their previous company, Peoplesoft.)

Asked if we are in a "bubble," Hoffman said in this environment, companies can have unprecedented growth rates, and some of the valuations will still look cheap when you look back at them in two to five years, while others will look expensive. Bhusri said there is "no public market bubble"; Workday was valued on similar metrics to what applied to Salesforce seven or eight years ago. Hoffman said that companies now have a choice as to when to go public, so it's no longer a success milestone.

The conference closed with a discussion with Softbank President Nikesh Arora, who noted the company's different approach to investing. Softbank founder Masayoshi Son made a early investment in Alibaba, so the firm owns 32 percent of the big Chinese Internet company, and thus would have a lot of money to invest.

Rather than competing with VCs who were investing $5 million to $50 million in early rounds, Softbank want to "go up a level" and make larger investments. For instance, he noted it recently made its first $1 billion investment in a Korean e-commerce market. The company is also interested in local players in Asian countries such as Korea, China, and India, such as GrabTaxi.

Asked why Softbank is not investing in Silicon Valley, Arora said it was on occasion, but that "valuations are rich." There are lots of people trying to invest in that market, trying to find the "next hundred unicorns."

One thing I found interesting was his discussion of how Google and Facebook have built huge advertising sales forces, and that lots of the "unicorns" will need to either build big sale forces to get to the revenues they will need to justify their investments, or they will have to go back to those companies. While some of these companies will do exceptionally well, he would rather look at less crowded investment markets.

Michael J. Miller's Forward Thinking Blog: forwardthinking.pcmag.com
Michael J. Miller is chief information officer at Ziff Brothers Investments, a private investment firm. From 1991 to 2005, Miller was editor-in-chief of PC Magazine, responsible for the editorial direction, quality and presentation of the world's largest computer publication.
Until late 2006, Miller was the Chief Content Officer for Ziff Davis Media, responsible for overseeing the editorial positions of Ziff Davis's magazines, websites, and events. As Editorial Director for Ziff Davis Publishing since 1997, Miller took an active role in...
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